The Inefficiency of the Stock Market Equilibrium under Moral Hazard

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Abstract

In this paper we study the constrained efficiency of a stock market equilibrium under moral hazard.We extend a standard general equilbrium framework (Magill and Quinzii (1999) and (2002)) to allow for a more general initial ownership distribution.We show that the market allocation is constrained efficient only if in each firm the entrepreneur who generates payoffs through unobservable effort has full initial property rights to his firm.This result holds even if the market can anticipate correctly the optimal effort choice of each entrepreneur from their observable financing decisions.

title = "The Inefficiency of the Stock Market Equilibrium under Moral Hazard",

abstract = "In this paper we study the constrained efficiency of a stock market equilibrium under moral hazard.We extend a standard general equilbrium framework (Magill and Quinzii (1999) and (2002)) to allow for a more general initial ownership distribution.We show that the market allocation is constrained efficient only if in each firm the entrepreneur who generates payoffs through unobservable effort has full initial property rights to his firm.This result holds even if the market can anticipate correctly the optimal effort choice of each entrepreneur from their observable financing decisions.",

Research output: Working paper › Discussion paper › Other research output

TY - UNPB

T1 - The Inefficiency of the Stock Market Equilibrium under Moral Hazard

AU - Calcagno, R.

AU - Wagner, W.B.

N1 - Pagination: 10

PY - 2003

Y1 - 2003

N2 - In this paper we study the constrained efficiency of a stock market equilibrium under moral hazard.We extend a standard general equilbrium framework (Magill and Quinzii (1999) and (2002)) to allow for a more general initial ownership distribution.We show that the market allocation is constrained efficient only if in each firm the entrepreneur who generates payoffs through unobservable effort has full initial property rights to his firm.This result holds even if the market can anticipate correctly the optimal effort choice of each entrepreneur from their observable financing decisions.

AB - In this paper we study the constrained efficiency of a stock market equilibrium under moral hazard.We extend a standard general equilbrium framework (Magill and Quinzii (1999) and (2002)) to allow for a more general initial ownership distribution.We show that the market allocation is constrained efficient only if in each firm the entrepreneur who generates payoffs through unobservable effort has full initial property rights to his firm.This result holds even if the market can anticipate correctly the optimal effort choice of each entrepreneur from their observable financing decisions.

KW - stock markets

KW - moral hazard

KW - general equilibrium

KW - efficiency

KW - allocation

M3 - Discussion paper

VL - 2003-107

T3 - CentER Discussion Paper

BT - The Inefficiency of the Stock Market Equilibrium under Moral Hazard